Dan Russell: Harold Demsetz's essay Toward a Theory of Property Rights is full of deep insights about why property rights exist within social groups in the first place. A good place to start is actually in the middle of the essay, where Demsetz talks about property rights within different groups of Native peoples in North America. One insight is that when property rights exist within a social group, it's because they have emerged as a response to a problem. Before the fur trade, Native peoples in the northeast part of North America hunted beaver in the commons. That is, nobody had the right to stop anybody else from hunting beaver. Since every beaver one person takes is a beaver that's no longer there for others, and that person doesn't have to compensate anyone for taking it, beaver hunting in the commons is a negative externality. Negative externalities are the unwelcome effects of my activities that get passed on to you at no cost to me.

Property rights could eliminate that externality, but property rights also cost something. People would have to create visible property boundaries. They would have to monitor and prosecute trespassers. They might have to work out systems for selling each other hunting rights and so on. As long as there weren't that many hunters and each hunter didn't take that many beavers, the costs of a property rights arrangement would have been even greater than the externality itself, so they were better off just living with the externality.

That all changed in the early 18th century with the advent of the fur trade. Suddenly, each beaver caught was worth a lot more, and so more hunters were catching more beavers. Now the externality was greater than the cost of eliminating it with property rights, and that is when and why property rights began to emerge. With property rights, people finally had to internalize the costs of their hunting and they had incentives to sustain the beaver populations on their land. What this piece of history shows is that property rights emerge as a response to a problem. Property rights allow social groups to continue to prosper together in peace by changing incentives to reduce the costs and increase the benefits of belonging to the group.

A second insight from Demsetz is that this first insight applies even when property rights don't emerge, because property rights can cost more than the problem they would solve is actually worth. For example, Native peoples in the southwestern plains always hunted animals in the commons, so on the surface, it looks like they did just the opposite of what people were doing in the northeast, but you have to look beneath the surface, because the animals in the southwest didn't have that much commercial value, and they were wandering animals that wouldn't have stayed within private hunting territories anyway. There was no property rights response to the hunting externality in the southwest because that response would have been far too costly for what it would have achieved. Property rights emerge as a response to a problem, but only when they don't create an even bigger problem. People in both the northeast and southwest were responding to externalities with property rights when that response made sense and not otherwise.

A final insight is that there are many different ways of responding to externalities with property rights. The particular responses that emerge are ones that are in proportion to the problems they solve. For instance, whether or not farmers will have property rights in croplands depends mainly on how fertile the land is. Where the fertility is low, people have to rotate to a new cropland every year, so the cost of controlling access to a piece of that land for years at a time would be greater than the value of the land itself. Instead, property rights attach to the crops and to the household objects that people can take with them when they relocate.

Even in the northeast, where property rights did attach to hunting grounds, those rights went only as far as they needed to go. Neighbors could still cross each other's land. In fact, they could even hunt beaver on each other's land as long as they left the owner the fur. When property rights emerge, they go as far as they need to go to address the problem they're a response to, and then they stop.

Humans are deeply social creatures, but being social has a cost, a cost we refer to as negative externalities. The convention of property rights emerged among humans as a response to that cost.